The new "code of conduct" that was supposed to protect lenders and borrowers from faulty appraisals has caused higher costs, delays and considerable chaos in home sales and loan refinances.

Mortgage brokers, appraisers and real estate agents are up in arms over the new rules, which dictate how lenders select an appraiser when they originate certain home loans. Few borrowers care much, if at all, about how appraisers are hired or paid, but those borrowers whose loans have been delayed or derailed due to the new rules may take a very keen interest, indeed.

At the center of the controversy is the Home Valuation Code of Conduct, or HVCC, which outlines appraisal-related practices lenders must follow with respect to so-called conventional or conforming loans that they want to sell to Fannie Mae or Freddie Mac. The practices are intended to reduce the incidence of appraisal fraud and prevent inappropriate pressure being placed on appraisers to inflate home valuations. The code, which became effective May 1, does not apply to "FHA loans," which are insured by the Federal Housing Administration, or "VA loans," which are guaranteed by the U.S. Department of Veterans Affairs. (Fannie Mae and Freddie Mac have both posted FAQs about the code.)

New rules protect borrowers from inflated appraisals

David Feldman, president of First American eAppraiseIT, an appraisal software and management company in Irvine, Calif., says the code is "very good for borrowers" because the new practices will help to ensure that home valuations will be "less inappropriately influenced."

"(Homebuyers) don't want to pay too much, and they want to pay the right price," he says. "For refinances, if you were hoping for a 'higher value,' prior to the code, if there was any pressure, you might have gotten it or not. Now that will be lessened, so it protects borrowers from themselves."

That may prove beneficial, yet the code also has created other unintended consequences in these areas:

Accuracy. The accuracy and credibility of an appraisal should be the borrowers' chief concern. Appraisal management companies, or AMCs, which now perform more than half of the appraisals nationwide, contract with tens of thousands of appraisers but typically assign jobs only to several thousand, who complete their work "quickly and with good quality and good service," Feldman says.

John Stafford, a loan officer with Reliant Mortgage in Dallas, takes exception to such claims. He says there are two types of appraisers: the "slap-dash" kind, who base their valuations on the first comparable sales they can find, and the more competent kind, who "work very hard to get the absolute best value, but fair value within the regulations as they are."

Borrowers should be concerned, Stafford says, because "a lackadaisical effort on an appraisal can easily create a value that is 10 percent lower than it should be." An artificially low value can kill a home purchase transaction if the appraisal doesn't support the sales price or derail a loan refinance if the appraisal results in a higher loan-to-value ratio and, consequently, a less attractive interest rate.

Timeliness. The timeliness of an appraisal is also a prime concern for borrowers because they typically need to meet the time frame of a purchase-contract contingency or interest rate lock.

Rob Carter, a Realtor with ZipRealty in Washington, D.C., believes the code has introduced much more uncertainty into the appraisal process.

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"We are all used to knowing when the appraisal is going to get done and what the outcome is going to be," he says. "It's a little frustrating when you don't know."

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